GE, Baker Hughes Could Reach Deal as Early as Next Week, Sources Say -- 2nd Update
October 28 2016 - 6:38PM
Dow Jones News
By Ted Mann
Merger discussions between General Electric Co. and Baker Hughes
Inc. are advancing and could result in a transaction as early as
next week, people familiar with the matter said.
Baker Hughes Inc. on Friday confirmed it is in discussions with
GE, a day after The Wall Street Journal reported the companies were
in talks about a potential transaction. A GE spokeswoman said
Thursday the company was pursuing "potential partnerships" with
Baker Hughes, but GE wasn't exploring an "outright purchase."
The companies are negotiating an unusually complicated
transaction, one of the people said. It could involve merging GE's
oil-and-gas business with Baker Hughes, which provides oil-field
services, and then spinning off the combined business into a new
public company. The discussions were moving quickly, another person
said.
In an email to employees, Baker Hughes CEO Martin Craighead
wrote, "I want to clarify that while we have been in discussions
with GE, nothing is concluded and there is no guarantee anything
will be concluded." He wasn't more specific about the discussions.
A copy of the message was filed Friday with securities
regulators.
Shares of the two companies rallied Friday. GE's shares gained
2.1%, to $29.22, in 4 p.m. trading, while Baker Hughes shot up
8.4%, to $59.12. GE and Baker Hughes declined further comment
Friday.
A combination could create a company with more than $25 billion
in revenue that could cut costs to better compete with rivals such
as Schlumberger Ltd. to provide equipment and services to oil rigs
and wells. But the companies' public statements have left Wall
Street confused and analysts contemplating various options
available to GE.
"Our first reaction is, 'What is a partnership?' " wrote
analysts for Credit Suisse. "Combining product lines or services
makes sense, but that is a 'joint venture,' not really a
partnership."
A partnership could be "very important strategically" for the
two companies, said Steven Winoker, an analyst at Sanford Bernstein
& Co., in a note to investors. Mr. Winoker also suggested GE
could leave itself an option to buy Baker Hughes down the line.
After two brutal years, GE and some of its rivals in the oil and
gas business have begun to see signs of hope. Crude prices, which
plunged from more than $100 in 2014 to $30 earlier this year, have
rebounded to around $50 recently.
Honeywell International Inc. CEO Dave Cote told investors
earlier this month that the company believes a recovery in the
energy industry is coming next year. "It won't be a V-shaped
recovery as we go into '17, but this is clearly the bottom, and
you're starting to see the improvement of that in the fourth
quarter and with the orders that we're already getting."
Just last week, GE also provided glimmers of improvement from
the third quarter, noting that U.S. rig and well counts remained
down 50% from the previous year, but had ticked upward in the
previous three months. Still, orders for services were down across
all of GE's oil business, the company said.
In recent public comments, GE has said it is still committed to
the oil and gas unit for the long term, but GE says operating
profit in the unit will be down by 30% for the year, and is cutting
more than $1 billion in costs out of the company over two
years.
There are "incremental cost actions" still to be made in the
business in 2017, Chief Financial Officer Jeffrey Bornstein said
last week on GE's third-quarter earnings call. But he agreed with a
stock analyst who suggested that the oil business could be running
low on areas to cut costs as it tries to return to
profitability.
"We think Oil & Gas is going to continue, as you look
forward, to be a drag," CEO Jeff Immelt said on a conference call.
"Our team is doing a really good job. We're executing well. We're
taking costs out. But we're not really forecasting a hockey stick
in Oil & Gas."
--Joann S. Lublin contributed to this article.
Write to Ted Mann at ted.mann@wsj.com
(END) Dow Jones Newswires
October 28, 2016 18:23 ET (22:23 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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